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Discounting Wal-Mart Is a Mistake

After dabbling again in initiatives far removed from pricing, the retailer returns to its roots.

You'd think they'd learn. Particularly in this recession, people mainly shop at Wal-Mart(NYSE: WMT) for their really low prices on groceries. In 2009, sales of grocery products accounted for more than half of the retailer's total revenue for the first time.

And consumers love the retail giant for that. According to the 2010 Colloquy Retail Index, Wal-Mart ranked highest in overall shopper loyalty, with its best showing in the Northeast and Northwest, while rivals Kroger(NYSE: KR), Publix, and regional chain H.E. Butt did best in the Midwest, Southeast, and Southwest, respectively.

Yet Wal-Mart seems unable to leave well enough alone, trying to come up with new ways to get higher-income consumers to drop more money in its stores, preferably on higher-margin items like clothing. A few years ago, it made the mistake of taking on Target(NYSE: TGT) by trying to be a fashionista, but that went wrong really quickly, and the retailer ran back to its roots of being the low-price leader.

The lure of attracting big spenders, though, couldn't keep it away from fiddling with its proven track record. Aside from changing its slogan from "Always Low Prices" to "Save Money. Live Better," Wal-Mart implemented Project Impact to reduce clutter from its aisles and take more share from competitors. The former was an admirable goal, but by removing some hundreds of items from its shelves, it resulted in some "self-inflicted wounds," as consumers couldn't find everything that they wanted in stores.

In the last year, sales have hit the wall, with comps dropping for three consecutive quarters as consumers also turned to competitors such as dollar-store chains Dollar Tree(Nasdaq: DLTR) and Family Dollar(NYSE: FDO).

Wal-Mart was killing its suppliers. Private-label drink maker Cott(NYSE: COT) saw its exclusive beverage-supply agreement with Wal-Mart cut. Kraft(NYSE: KFT) blamed "reduced merchandising" in biscuits at "a key customer" for its own weaker performance in the category last quarter.

Wal-Mart has seen the light ... again. It's not abandoning Project Impact per se, believing it did the right things for the right reasons, but it is bringing back many of those items it had cleared from its shelves, some 300 of them. Perhaps it realizes at last that if it wants to carry through on its promise to keep the customers it won over during the Great Recession, it does just come down to price.

As its U.S. chief operating officer noted, "Our Oreos are cheaper than their Oreos, [and] the customer knows that we have a better price." That can make Wal-Mart a slam dunk investment cookie.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.